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What would you do if you won the 2010 World Series of Poker – Part III?

You’ve fought through a field of thousands, and now you’re sitting across the table from Phil Ivey – heads up for the most coveted bracelet in sport.

Of course, you’re just thinking that you already have the $5 million runner-up prize ‘in the bag’ (allowing you to have a very nice – and, ‘guilt free’ – $250k spending spree, and then live this quite pleasant $250k/year lifestyle) …

… but, you’re hoping-against-hope that you beat Phil senseless and pocket the $8.5 million first prize!

Firstly, let me burst your balloon: you’re still a ways off the $11 million (plus a bit extra for up-front ‘splurging money’) that you’ll need if you want to live this rather lavish $550k per year lifestyle … but, you’ve still made your own $7 million in 7 years, and then some! 🙂

I’m now assuming that you’ve made your Number …

… so, the key is to protect your wealth (to ensure that you have that $250k – give or take – to live off, inflation-adjusted, for the rest of your life); you do this in any number of ways:

– Invest in Index Funds and live off 5% (dividends + selling off some shares each year), enduring the ups and downs of the market,

– Invest in Inflation-Protected Federal Government Treasury bonds, suffering the low returns currently available, with the option to ‘spice things up a little’ by using up to 5% of your capital each year to buy 12 month call options over the market,

– Invest in real-estate; since you’re not trying to create new money, you can afford to pay cash and simply live off 75% of the rents (setting aside, perhaps, another 5% of your starting capital and 25% of all net rents against vacancies, repairs/maintenance, and other contingencies).

Of these, the last holds the most attraction for me, because:

– I don’t require much liquidity (I’m looking for steady income), but can always keep aside another couple of year’s of living expenses (say, $500k) in cash … just in case,

– My income (i.e. the rents) is generally inflation-adjusted (and, rents usually go up – over the long’ish run – in line with inflation),

– I never need to worry about eating into my capital: it’s sitting there in bricks and mortar – also growing at least in line with inflation!

Of course, you could always just blow it all on a mansion and a garage full of Ferraris 🙂

A single property may represent a large portion of net worth making it difficult to sell at the right time if needed, e.g. if rent increases lag interest rate hikes? A ready supply of ferraris may just be the answer if instant liquidity is required in a bear RE market.

@TI, actually if you want, you can “practice” owning a yacht: get under the shower fully clothed, turn on the cold water and slowly tear up $100 bills. If it is a big yacht, tear ’em up fast. To make it more realistic, ask your wife to yell at you while you are under the shower 🙂

AJC, the following is re-posted from the first post on this topic, to make it available for discussion:

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Maybe this thought may make some sense. I had once heard there are 4 types of money:

1. Money you earn yourself and spend on yourself.

2. Money you earn yourself and spend on someone else.

3. Money that you did not earn that you can spend on yourself.

4. Money that you did not earn that you can spend on someone else.

Note that #1 tends to be spent the most conservatively I dare say- the reason is that you understand the value of the effort required to earn that money and can use that to determine the best value for money when spending.

#2 is almost as good as #1 however you are buying something for someone else.

#3 is likely what you are alluding to for the case of winning the World Series of Poker, or the lottery, or a stock option windfall, etc. When such a large sum comes in then it’s hard to ‘value’ the effort required to earn this money. And therefore it’s easy to lose perspective and blow the money on cars, boats, parties, etc. This is where you need to make some rules to help people hang on to what they got. In this case the phrase Easy come, Easy go does indeed apply.

Since the only way I will get to $6 million would be through money earned by myself it’s unlikely I’ll ever be in the Easy Come, Easy Go mindset.

Oh and for point #4 this is the most inefficient way to spend money. Tax money and political spending all fit into this category- there is no level of effort required to ‘earn’ the money and it’s not being spent directly for the politicans’ benefit so that’s why there is so much wasteful spending going on without any pain or hardship on the decision maker.